Faculty of Law, University of Toronto
The James Hausman Tax Law & Policy Workshop Series
presents
Professor David I. Walker
Boston University School of Law
Are Tax and Accounting Rules Discriminating against Discounted Employee Stock Options Justified?
Wednesday, January 21, 2009
12:30 – 2:00
Solarium (Room FA2)
84 Queen’s Park
Contemporaneous grants of both stock and at-the-money options to individual employees of U.S. public companies indicates demand for equity compensation packages that are in the money, i.e., packages of equity pay instruments that in aggregate have payoff profiles and incentive properties that are similar to explicit in-the-money employee stock options. However, several tax rules (and formerly accounting rules) strongly discourage grants of explicit in-the-money options, including recently enacted IRC § 409A, which essentially precludes the use of explicitly discounted options by taxing these instruments at vesting, rather than at exercise, and adding a 20% penalty tax. This article explores whether the tax and accounting distinction between discounted and non-discounted options makes sense. The stated legislative rationales for rules discriminating against explicit in-the-money options are weak, reflecting a dichotomous view of equity compensation divided between discounted and non-discounted options, when, in fact, option design is a continuum. However, there is a tax policy rationale for forcing firms to bifurcate in-the-money pay packages into discrete grants of stock and at-the-money options, a combination that I refer to as a synthetic in-the-money option. In short, doing so precludes the unwarranted expansion of preferential option tax treatment to instruments resembling restricted stock. But there is a cost if firms are forced to utilize suboptimal compensation schemes. The extent of the cost depends in large part on how close a substitute synthetic in-the-money options are for the real thing. This article argues that the two are close, but not perfect, substitutes. Thus, at this stage of the investigation, this article identifies opposing benefits and costs to rules discriminating against discounted options, yielding indeterminacy, rather than a clear policy prescription.
Professor David Walker joined the faculty of the Boston University School of Law in the fall of 2002. He was promoted to full professor in 2008. Professor Walker teaches courses in taxation, corporate law, law and economics, and the economic structure of commercial transactions, a.k.a. “deals.” His research and writing reflect those interests. Recent projects include “Unpacking Backdating: Economic Analysis and Observations on the Stock Option Scandal,” published in the Boston University Law Review, and “Financial Accounting and Corporate Behavior,” published in the Washington and Lee Law Review. Professor Walker is a 1998 graduate of Harvard Law School and a recipient of that school’s John M. Olin Prize in Law and Economics. Upon graduation, he clerked for Judge Karen Nelson Moore of the U.S. Court of Appeals for the Sixth Circuit and then returned to Harvard Law School for a year as an Olin Fellow. Immediately prior to his arrival at BU Law, Professor Walker was an associate in the tax department at Ropes & Gray, where he had a general tax practice with an emphasis on executive compensation. Before attending law school, Professor Walker enjoyed an interesting and varied career in the oil industry that included roles as a chemical engineer, crude oil trader, and assistant to the president of BP Oil Company, the U.S. arm of British Petroleum. His undergraduate degree in chemical engineering is from Vanderbilt University.
A light lunch will be served.
For more workshop information, please contact Nadia Gulezko at n.gulezko@utoronto.ca.
